The Carbon Border Adjustment Mechanism (CBAM) is an EU policy designed to prevent carbon leakage by imposing a carbon cost on imported goods equivalent to that faced by EU producers under the EU Emissions Trading System (ETS). CBAM compliance requires importers to report and pay for the embedded carbon emissions in their products, encouraging transparency and accountability in global supply chains. CBAM creates strong incentives for innovation by internalizing the cost of carbon emissions, motivating both domestic and foreign producers to adopt cleaner technologies and production processes. Firms aiming to remain competitive must invest in low-carbon innovations to reduce their carbon footprint and associated costs under CBAM. This fosters a market-driven shift towards sustainable industrial practices and accelerates the development and deployment of green technologies. Moreover, CBAM encourages exporters to align with stricter environmental standards to maintain market access, stimulating global climate action. By linking trade policy with carbon pricing, CBAM not only ensures fair competition but also promotes innovation in decarbonization, contributing to the EU’s broader climate goals.